Three Common Mistakes Companies Make When Negotiating Incentives
Tax incentives awarded by the government are generally used for economic development purposes to achieve two main goals: creating jobs and growing the tax base within a target jurisdiction. Some incentive programs across the country are similar in nature, but every state, county and city has their own approach and unique programs.
Navigating the incentives negotiation process can be time-consuming for a CEO or CFO, especially given the fact that they have a company to run in between negotiations. A finance executive who had worked with public economic development agencies recently complained to me about the many government layers he had to work through, including a local chamber of commerce, the city government, the county government, a regional partnership and the state. For someone who does not specialize in working with these agencies, the pure bureaucracy can seem daunting and it can create missteps. Here are three examples of common mistakes and solutions for negotiating your incentive package:
1. Knowing who should be involved in the process
This is an example of a company whose CFO had historically negotiated their own incentives packages. At one point he had negotiated a $350,000 package on a $4 million expansion project and asked me to verify whether they had secured a maximized package. Up to that point, he had worked with their county and state, with minimal state participation. It is critical to engage all organizations with a stake in the project, as I was able to identify private agencies willing to assist with infrastructure and utility grants specifically tailored to expansion projects within their county.
There may be grants or other incentives available to certain areas of a state for which a project may qualify. I was able to identify a state infrastructure program that by statute could only be accessed by four counties within the state, which did not include the county where this project would take place. The program would have allowed the company to access a $300,000 grant to upgrade and extend their rail lines on site. By working with the state legislative representative, the statute was amended to include their county, along with several others.
By inviting private agencies to the negotiating table and increasing state participation, the company ultimately accepted an incentives package worth $1.4 million, which created more than 100 local jobs and a significant boost to the local tax rolls. Ultimately it was a win/win for all parties involved.
2. Understanding the economic impact of the project
This is an area where different jurisdictions have an individual approach to incentives. Many companies disclose their capital investment and job creation projections in the first year of operation. However, in many parts of the country, the government will be interested in the economic impact for the next three years.
A separate problem arises for companies who are projecting additional growth on the back end of that three-year period or beyond. Therefore, it is important to know what the state and municipality is willing to include in the project scope. There was a company in the southeast who was planning a $25 million capital investment project over three years, along with an additional $50 million in years four and five. This state would only look ahead three years, but from completing a previous project in the state I knew they could make an exception for an additional two years under certain circumstances. The result was a much larger incentive package where the final two years would be performance-based, meaning if the company did not meet their growth plans in the final two years they would not be penalized.
3. Meeting documentation and compliance requirements
Due to the multiple government layers with most projects, compliance requirements can be multi-layered as well. Each state, county and city can have their own documentation requirements. It is great to be offered a $5 million incentive package for a project, but failing to provide proper documentation in a timely manner can prevent you from ever receiving those funds. An oversight or missed deadline can result in a loss of hundreds of thousands of dollars, if not millions.
As an example, a company received incentives from multiple government agencies and each agency required quarterly documentation for up to four years. However, each agency’s quarterly deadline fell on a different date, creating multiple filing deadlines every quarter. To ensure the company did not miss a deadline, I provided a detailed Outlook calendar with reminder alerts, which was sent to the company’s representatives. Each time a reminder notification is sent, I pre-fill as much of the paperwork as possible and send it to the company representative in advance of the deadline. This streamlines the compliance process for the company and they are able to capture all of the incentives they were originally offered.
Incentives are a powerful tool, creating win/win scenarios for both the company and the government. As with any business negotiation, negotiating incentives is a combination of art and science. Avoiding common mistakes and knowing how different programs work across the country can lead to differences of six and even seven figures. In the end, that certainly affects the project’s ROI and it could even be the difference in whether the project is initially successful and sustainable.
Renée Rosenheck contributed to this article. Kris Phillips and Renée Rosenheck are co-founders and Principals of Global Growth Advisors LLC, a professional firm that negotiates and maximizes incentives packages for companies investing in the United States.